TO:	Honorable Greg Bonnen, Chair, House Committee on Appropriations
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	SB30 by Huffman (Relating to supplemental appropriations and reductions in appropriations and giving direction and adjustment authority regarding appropriations.), Committee Report 2nd House, Substituted

ACTUARIAL EFFECTS

The bill would appropriate $165.6 million to the Employees Retirement System (ERS) from the general revenue fund for the purpose of implementing the provisions of Senate Bill 321, 87th Legislature, Regular Session, 2021.  The bill would appropriate an additional $1 billion from the general revenue fund to ERS for the purpose of amortizing the unfunded liability of the ERS retirement program.  Finally, the bill would appropriate $3.5 billion from the general revenue fund to the Teacher Retirement System (TRS) for the purpose of providing a benefit enhancement for retired teachers who are members of TRS.

According to ERS, given the estimated $334.3 million legacy payment during fiscal year 2023, the lump sum appropriation of $165.6 million would largely make up the difference as compared to the anticipated $510 million legacy payment. Assuming the state continues the $510 million legacy payment, the additional $1 billion from the bill would save the state $5.6 billion in interest and accelerate the time to full funding by five years.

The actuarial review states under the current Pension Review Board (PRB) Pension Funding Guidelines, funding should be sufficient to cover the normal cost and to amortize the unfunded actuarial accrued liability (UAAL) over as brief a period as possible, but not to exceed 30 years, with 10 - 25 years being the preferable target range. ERS statute defines actuarial soundness for purposes of making modifications to benefit and contribution levels as no more than 31 years.

ERS is projected to be actuarially sound as of August 31, 2023, with the system fully funded by 2054 or earlier. Following the passage of this bill, the amortization period would decrease by five years.  According to TRS, the bill would not impact the system since the $3.5 billion would be used to fund a benefit enhancement contingent on enactment of separate legislation.

SYNOPSIS OF PROVISIONS

This supplemental appropriations bill includes a $165,600,000 legacy payment and an additional $1 billion from the general revenue fund to amortize the ERS unfunded liability. It also includes $3.5 billion from the general revenue fund for a TRS benefit enhancement that is contingent upon both passage of legislation authorizing a benefit enhancement and on the fund remaining actuarially sound.

FINDINGS AND CONCLUSIONS

The actuarial analysis (AA) estimates a reduction in the ERS amortization period by approximately five years, reducing the time to full funding from 2054 to 2049. The AA also estimates the state would save $5.6 billion in interest over that period.

The actuarial review notes it is possible the legacy payment could be reduced in future years since Senate Bill 321, 87th Regular Session, specifies the legacy payment is recalculated before each legislative session to achieve full funding by 2054. Under this approach the state would save approximately $2.4 billion in legacy payments and an additional $1.2 billion in interest through 2054 until the system is fully funded.

METHODOLOGY AND STANDARDS

The ERS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS actuarial valuations for February 28, 2023.

According to the PRB staff actuary, the actuarial assumptions, methods and procedures are reasonable for the purpose of this analysis. All actuarial projections have a degree of uncertainty because they are based on the probability of occurrence of future contingent events. Accordingly, actual results will be different from the results contained in the analysis to the extent actual future experience varies from the experience implied by the assumptions. This analysis is based on the assumption that no other legislative changes affecting the funding or benefits of ERS will be adopted. It should be noted that when several proposals are adopted, the effect of each may be compounded, resulting in a cost that is greater (or less) than the sum of each proposal considered independently.

SOURCES

Actuarial Analysis by Dana Woolfrey, FSA, FCA, EA, MAAA, Gabriel, Roeder, Smith & Company, March 17, 2023.
Email Correspondence from TRS, March 17, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 17, 2023.

GLOSSARY
Actuarial Accrued Liability (AAL) -The current value of benefits attributed to past years.
Actuarial Value of Assets (AVA) - The value of assets used for the actuarial valuation. The AVA can be either the market value (MVA) or a smoothed value of assets.
Amortization Payments - The portion of the total contribution used to reduce the unfunded actuarial accrued liability (UAAL).
Amortization Period - The specified length of time used when calculating the amortization payment portion of an actuarially determined contribution, or as the time it would theoretically take to fully fund the UAAL or fully recognize a surplus. The Pension Review Board recommends that funding should be sufficient to cover the normal cost and to amortize the UAAL over as brief a period as possible, but not to exceed 30 years, with 10-25 years being the preferable target range.
Actuarial Cost Method -An actuarial cost method is a way to allocate pieces of a participant's total expected benefit to each year of their working career. In other words, it is a technique to determine how much of the present value of future benefits (PVFB) to assign to past service (AAL) vs. future service (present value of future normal costs, or PVFNC).
Funded Ratio (FR) - The ratio of actuarial assets to the actuarial accrued liabilities.
Market Value of Assets (MVA) - The fair market value of the system's assets.
Normal Cost (NC) - Computed differently under different actuarial cost methods, the normal cost generally represents the current value of benefits attributed to the present year. The employer normal cost equals the total normal cost of the plan reduced by employee contributions.
Present Value of Future Benefits (PVFB) - The current value of all benefits expected to be paid from the plan to current plan participants.
Present Value of Future Normal Costs (PVFNC) - The current value of benefits attributed to the present year and all future years (includes the normal cost as the first year).
Unfunded Actuarial Accrued Liability (UAAL) - The difference between the actuarial accrued liability and the actuarial value of assets; therefore, the UAAL is the amount that is still owed to the fund for past obligations.